美國航空 (AAL) 2003 Q2 法說會逐字稿

Good afternoon an afternoon and welcome to the AMR second quarter earnings release conference call.

All participants will be able to listen only until the designated question-and-answer session.

All analysts will have the opportunity to first ask the questions.

Once the question-and-answer session has ended we will ask analysts to disconnect and we will continue with questions from our media.

This conference is being recorded.

If you have objections please disconnect at this time.

Kathy Bonano, director of investor relations.

You may begin.

Good afternoon, everyone.

Thank you for joining us today.

This afternoon I'm joined by Mr. Gerard Arpey, AMR's President & CEO, and Mr. Jeff Campbell, senior vice president of finance and Chief Financial Officer.

For those of you familiar with our typical earnings calls format, we've had Gerard joining us and this represents the first earnings call with Gerard at the helm.

Gerard will review the highlights for today and Jeff will continue after that.

After that we will be happy to take your questions.

Our earnings release contains highlights of our financial results for the quarter.

I encourage you to review that document for more specific information.

We've posted our earnings release on the investor relations section of our Website, at www.amrcorp.com.

At that same Website interested parties may listen to a live webcast of today's call and review a slide deck provided in connection with the webcast.

The slide deck will include reconciliation to what we think is the most appropriate GAAP measurement.

Replay of the call will be available until at least July 23rd, 2003.

Finally, let me note that many of our comments today on matters related to our outlook for revenue and earnings, cost estimates and forecast of capacity, traffic, load factor and fuel cost will constitute forward-looking statements.

These matters are of course subject to a number of factors that could cause actual results to differ materially from our expectations.

These factors include domestic and international economic conditions, commodity prices, general competitive factors including but not limited to government regulations, uncertainty in domestic or international operations, acts of war or terrorism, our ability to access the capital markets, and changes in the company's business strategy.

Any of which could affect our actual results.

Now I'd like to turn it over to Mr. Gerard Arpey.

Thank you, Kathy.

Good afternoon, everyone.

As Kathy mentioned I'd like to take a moment and bring everyone up to speed on the progress that we're making under our turn around plan.

I'm sure all of you saw the encouraging news in our press release this morning announcing AMR's modest profit in the month of June.

This is obviously a terrific result and continues the trend of improving performance we've seen moving from April through May and into June.

As you'll recall, April was a fairly dismal month with the war in Iraq, and that being on television every night, and the SARS outbreak seeming to spread uncontrolled around the world.

But by May these threats diminished and we saw a resurgence of demand and year-over-year improvement in unit revenue that out paced the industry.

This combined with the partial implementation of our labor cost restructuring efforts gave us in May our first positive cash flow from operations for some time, with June results, the power of our restructuring efforts has been even more apparent, and we are pleased to report positive, albeit modest earnings for the month of June.

Earnings for the second quarter overall were better than expectations with the reported GAAP net loss of $75 million or 47 cents per share.

As all of you know we did receive $358 million from the federal government in the second quarter, which is recorded as a special item.

If you exclude that special item, and a couple of other items, special one-time items, our loss for the second quarter was $357 million, or $2.26 a share.

The real driver of our improved results was the implementation of the labor agreements we reached in May.

As all of you know our labor groups have agreed to a compensation package that will reduce our operating expenses by $1.8 billion per year.

I think that commitment underscores the commitment of all of our employees towards the future of this company.

In addition, we reached agreements with many of our vendors, creditors and suppliers to cut expenses by another $200 million a year and we are continuing to make good progress in implementing our other $2 billion in strategic initiatives that are mostly aimed at reducing cost.

In addition to the positive steps that were taken to cut costs we are also making great strides on the liquidity front.

Our cash and short term investment balance at June 30th was 2.4 billion dollars, a substantial improvement from the end of the first quarter when our balance was $1.8 billion.

And since June 30th, our continued stronger operating results and the closing of the $250 million ETC financing have further improved our cash balance.

And as we sit here today it sits at just over $2.7 billion.

Now, all of this progress is certainly encouraging.

But as I've made clear to everyone, we're going to continue under our turn around plan to take the difficult actions necessary to position our company for long-term success.

Today we announced a couple of [tough decisions.] The first is that we will reduce the size of our operation in St. Louis on November 1st and concentrate more on serving the local community.

As a result our Chicago and Dallas/Ft.

Worth hubs will see an dm crease in flights.

Additionally we're going to close our third reservations this year, this one in St. Louis as we continue to see more and more people shift to the Internet and other options rather than choosing to call us on the phone.

Let me just take a moment and touch briefly and touch briefly on the rationale for the St. Louis hub decision.

When we bought the TWA assets back in April of 2001, it was a response to the proposed United U.S.

Airways merger.

It was intended to gain access to an existing east-west hub when our other two east-web hubs at the time were becoming capacity constrained.

And it was in part an opportunity to gain other key assets, including gates and slots enmass that otherwise may have gone to our competitors in a piecemeal fashion.

As all of you know the terrorist attacks, the poor economy, change in the market place, and many other things have clearly affected our ability to make the St. Louis hub a success.

Today's decision on St. Louis had a is able to accomplish a few things.

First, we are able to eliminate the flying we need to cut as we continue the reduction in fleet size that we announced sometime ago.

And that's an important consideration today.

We're not announcing today further reductions in our fleet.

But this decision in St. Louis will allow us to continue the implementation of the reduction in the fleet that we've already announced.

And second, we'll be able to provide the people of St. Louis and the surrounding areas the service that allows them to travel on routes they fly the most.

In fact, the studies that we've done show that nearly 70% of the current local traffic to and from St. Louis fly on the nonstop routes that we're going to be retaining in the market.

So St. Louis remains an important city for us.

We'll still have over 200 flights a day between American and our commuter partners, and it's a city that we're going to work real hard to make successful.

With the reduction in flights in the closing of the reservations office, we'll reduce our St. Louis workforce by more than 2,000 employees.

I sincerely regret that former TWA employees will once again be adversely impacted.

However, we simply got to make the decisions that will help our long term success and these actions in St. Louis I think clearly fall into that category.

We will still maintain our St. Louis pilot and flight attendant bases to support the smaller hub that we're going to be operating there.

We mentioned a few weeks back that we're also looking at our three maintenance bases.

We've yet to make any decisions regarding the bases.

We're continuing to look at the incentive packages that several cities have proposed to us, and I'm really pleased by a lot of what we've seen, and encouraged by all the support we've gotten in several of these cities.

So we're trying to Pore through and look at these incentive packages and try to figure out what's best for our future and I suspect we'll make a decision on these facilities in the very near term.

Finally on a couple of other matters you'll see a press release that is going out shortly announcing some vice president appointments.

These are not new positions.

These are replacements for officers who have recently left our company.

And while we hate to see anyone leave American, I think these appointments highlight the depth of our management team.

Each of the folks that you'll be reading about has a long track record of success at American, and I'm sure they're going to do a terrific job for us.

Also, today our board approved the annual stock-based incentive program for management, something that we do every year at this time.

And I think with all of that said Jeff, I think I'll turn it over to you to go through the financials in a little more detail and then we can both take some questions.

Thanks Gerard and good afternoon everyone.

As Gerard explained, our second quarter results are the tail of radically changing month by month.

I'm going to first briefly discuss our overall quarterly results and explain our special charges.

But then I want to move to a discussion of the trends in our performance both during the second quarter and in the future.

I'll start with our rather dramatic downward cost trends which are the real driver of our improved outlook.

Then I'll discuss our revenue trends which, while improving, certainly remain historically weak.

And last I'll turn to our efforts to rebuild liquidity and access to the capital markets which I feel increasingly good about.

Our reported loss for the quarter was $75 million or 47 cents a share.

While that's good I think it is more meaningful for investors to look at our results excluding the U.S. government grant that Gerard discussed as well as certain special charges.

When we do exclude these items our loss for the second quarter increases to $357 million or $2.26 a share.

To elaborate on the two special items the U.S. government grant is clearly the most straightforward.

It is the money we got from the government in May and we just recorded it a special credit in operating expenses.

A little bit more complicated is the second charge.

We recorded a total of $76 million in special charges in the second quarter, driven by what I really think of as a massive restructuring of our business.

Our new labor agreements in particular have driven a wide range of positive and negative noncash accounting charges for the quarter for such things as severance payments relocation cost and vacation liability reductions.

For our pensions the new labor agreements drove a one time curtailment charge as well as a remeasurement with a lower discount rate that from a balance sheet perspective drove a an additional charge directly to stockholders equity of $334 million.

Just to emphasize that $334 million is not a P&L item and similar to a larger charge we recorded in the fourth quarter 2002.

As part of our business restructuring, we've also negotiated concessions on almost 200 of our aircraft financing agreements many of which also drove some one-time accounting.

And in addition we've taken some facility write-down charges as our need for facilities has declined along with our capacity.

So the net result of all this restructuring is a special charge of $76 million in the second quarter.

Going forward, a few of our aircraft restructuring deals have fallen outside the second quarter and I'd expect them to drive some significant accounting P&L good guys in the third quarter.

Let me now turn to our cost performance which I think is the real story of the quarter.

Immediately following the tragic events of September 11th it became apparent to us that we needed to significantly reduce our costs in order for AMR to survive as a viable competitor.

To that end we established a goal of removing $4 billion from our annual operating costs.

Today less than two years later we are well down the path to achieving the entire $4 billion savings goal.

Our labor savings will phase in over the next couple months, reaching our run rate of $1.8 billion per year by the fourth quarter of this year.

Our concessionary agreements with our suppliers and creditors will add another $200 million per year.

And we continue to implement structural cost savings which will by the end of 2005 reduce our capacity neutral costs by $2 billion per year, compared to a 2001 base.

With savings from all of these efforts at least partially in place for the second quarter our main line unit cost improved 10.8% year over year on a reported basis.

Excluding special items our unit cost improved 5.6% to 10.2 cents.

This improvement came not just from the labor and nonlab concessions we implemented, but as you can see in our press release also in every line just about of our P&L.

So of course I think it is fair to say we are all incredibly pleased with our cost results for the second quarter.

However the magnitude is really much more compelling if you look at the monthly trends.

Going back to April prior to the implementation of our labor agreements our main line unit costs were 11.01 cents.

In May we began implementing our modified labor agreements, and the impact on unit costs was immediate.

Month over month, unit cost declined by 8.7% to 10.05 cents.

In June you see further improvements as both our labor and nonlabor restructuring efforts came more fully implemented.

For June our unit cost dropped another 5.4% for month over month to 9.51 cents.

Going forward, our labor agreements will produce savings of almost $400 million in the third quarter, and reach steady state savings of $450 million in the fourth quarter of this year.

These savings when factored in with our strategic initiatives and nonlabor savings should result in our main line unit cost for the third quarter being about 9.6 cents down nearly 8% from last year's third quarter level.

At the AMR level unit costs for the third quarter are expected to come in just under 10 cents, 7.4 cents better than last year level.

One other note is that in addition to the third quarter aircraft special charge are in fact good guy that I already mentioned it's not unreasonable to expect that there might be special charges in the third quarter related to today's network announcement and Res office announcements but it's too early for us to tell you specifically about them at this point.

Now the only bad news in terms of our cost cutting efforts is the reality of persistently high fuel prices which averaged 83 cents during the second quarter.

This represents a year over year increase of neither 10%.

Without the increase in fuel prices our main line costs would have improved by 6.8%.

The increase in fuel costs for the second quarter came despite hedging gains of $16 million or 2.2 cents per gallon.

Our cost forecast for the third quarter assumes a fuel cost of 84 cents per gallon up almost 8% from last year's cost of 78 cents.

This moves our third quarter overall cost outlook a bit above our June actual results rather than coming down even further.

For the back half of '03 we currently have fuel hedges covering about 30% of our expected consumption at a WTI crude equivalent price of just under $23 per barrel.

We also continue to plan for reduced capacity on a year-over-year basis.

For the third quarter we expect main line capacity to be down more than 5% from last year's third quarter.

Capacity in the fourth quarter should be essentially flat year over year.

Going forward as we align our mid continent hubs we'll actually gain a bit in terms of aircraft productivity.

This will draw a small increase in total ASMs despite having the same number of aircraft.

While I'm on the subject of our network changes let me also point out that in time we expect both cost reductions and revenue improvements resulting from the realignment of our mid continent hubs.

We will be able to eliminate a number of facility expenses and reduce unit cost through labor efficiencies.

Additionally our unit revenue should improve as we shift capacity to higher yield and market and gain sellup opportunities.

Now this presents a nice segue for me to move on to the revenue side of the equation, which while improving still remains weak by any historical standard.

American's unit revenues improved about 2.5% to 8.7 cents and I'm not counting the fourth quarter of last year where unit revenue was better than 2001 for obvious reasons.

This is the first year over year improvement in quarterly revenue we've seen since the first quarter of 2001.

As we mentioned in our press release we had strong unit revenue improvements in both May and June to be specific May unit revenue was better than last year by nearly 5% and in June the improvement was almost as strong at over 3%.

While this is encouraging the majority of the unit revenue improvement for the quarter was driven by load factors which were up 3 points from last year.

Unfortunately yields for the quarter fell by 1.7%.

This weakness year over year is discouraging but we are able to find some good news.

On a monthly basis June's level of corporate traffic and revenue showed signs of definite improvement relative to both April and May.

And our share of existing corporate traffic remains steady and in fact showed some improvement on a year-over-year basis.

Before I move on from revenue let me briefly review our second quarter revenue results by entity.

Our domestic unit revenues were up compared to last year by 4%.

This improvement was driven by a load factor increase of 4.4 points with domestic yields down 2% year over year.

Now we do have some hope for yields going forward.

Next quarter we should see greater benefit for the $5 one way fare increase implemented in May.

Additionally with a better alignment of capacity and demand this year the industry may well benefit from a reasonably stable pricing environment.

In the second quarter we did see a reduction in both the number of days that [seams] by major carriers were available and in the level of discounting.

Turning to international, our unit revenues declined during the quarter, down 1.2% from last year's second quarter level on a less than 3% reduction in capacity.

During the second quarter international load factors fell half a point while yields were down slightly from year ago levels.

Our results internationally however were clearly mixed by region with the Pacific showing the weakest unit performance and Europe performing the best.

Let me remind you before I give you the specific facts by entity that this year's results also include the impact of our 767-300 reconfiguration which added 24 seats to each plane.

So on a year over year basis our international ASM numbers will work worst than they had after the change but of course if we talk about cost on an ASM level it would look quite a bit better.

That said our European revenues increased 2.4% year over year on a 2.4% reduction on capacity yields in, Europe increased 2.8% for the quarter while load factors were down less than half a point.

Moving on to the Pacific, although a small piece of our entity mix the Pacific did post a tremendous unit revenue decline during the second quarter, unit revenues fell by more than 20%, from the second quarter of last year, on a load factor decline of over 15 points.

The good news here is that load factors improved significantly during the quarter.

April loads were down 30 points year over year, May down 12 but by June our loads were actually flat year over year.

Finally unit revenue for Latin America was down 1.8% compared to last year on a relatively modest capacity decline of just 1.8%.

Looking forward, our system wide book load factor for the third quarter is currently flat with last year, bookings are stronger for the domestic system than they are for international.

While forecasting traffic for the quarter is going to be a challenge given the evolving environment, given recent improvements I would expect overall traffic to decline by significantly less than our planned capacity reduction of 5% for the third quarter.

Last, while we remain cautious about revenue performance going forward our July results to date are encouraging.

And of in fact coming in better than we had anticipated.

The net results of our strong cost restructuring combined with modest revenue improvements is that we've been able to make some real progress in terms of liquidity and I'm certainly encouraged about our access to the capital markets.

As we've already said we ended the quarter with $2.4 billion in total cash and short term investments which is a substantial increase of last quarter's balance of $1.8 billion.

And to look at the April May June trend in terms of cash I don't have to remind you that April was a tough month and we were still burning cash at an absolutely frightening rate.

But with the end of the war in May, a seasonal uptick in demand and the implementation of labor and nonlabor agreements the bleeding of cash ceased and we experienced a positive cash flow for the first time in a long while.

On top of that we received a reimbursement check from the federal government of $358 million which further gave our cash balance a nice boost.

In June our overall total cash flow was quite positive even before considering the boost from the sale of our stake in World Span which generated an additional $180 million.

As Gerard said since the quarter closed, we have made even further progress on the liquidity front, closing aircraft financing and as a result of that financing we received about $250 million in cash secured by most of our remaining 1110 eligible aircraft.

That leaves our unencumbered aircraft balance at $1.7 billion.

I should also note that included in our total cash in short term investments balances about550 million in restricted cash, which mostly covers workers' compensation claims and some other operating needs.

As our financial condition recovers I would hope that we could free up some of this cash.

Similarly, if current performance trends continue we should expect to see some reversal in the vendor-driven cash squeeze that we experienced during the height of our financial crisis in April.

On the balance sheet we ended the second quarter of '03 with about $18.4 billion of net debt.

That puts our net debt to capital ratio at about 100%.

While we're on the subject of liquidity let me give you our plans going forward for capital spending, debt payments and pension funding for the remainder of this year and for '04.

For the back half of this year our capital spending is planned at $650 million, 400 of that being aircraft for which we have preexisting financing.

Last year we estimated at about $1.2 billion which is actually done $200 million from the plan we had a couple of months ago.

Once again we have preexisting aircraft financing to cover about two-thirds of that spending which is the aircraft piece.

Principal and the principal portion of our capital lease obligations for the third and fourth quarters of this year should total about $360 million.

Additionally we have about $200 million in municipal bonds which have mandatory -- which have a mandatory put provision effective in November.

Our total principal payments in '04 are expected to be just over $760 million.

On the pension sides for the second half of this year our funding requirements are minimal.

The July through December totals about $120 million.

And in fact just yesterday we paid the first $55 million of that in a contribution.

Next year our funding requirements will range depending on the final interest rate environment, et cetera, at between 500 and $700 million.

Finally and before moving on to questions let me touch briefly on results for our regional affiliates.

Beginning with our first quarter financial statements this year, we modified the way we account for the revenue and expenses of our regional carriers to better align our internal view of American Eagle's performance with the way that the industry looks at regional performance.

This change represents an accounting adjustment only, doesn't have any P&L impact for AMR.

But what we did as a passenger revenue for all of our regional affiliates will be combined in one entity rather than separating out American Eagle.

On the expense side American Eagle expenses are recorded on the appropriate expense line to the AMR’s P&L, while payments to our nonowned regional affiliates are recorded as other expense.

As for the second quarter results on the regional side, once you eliminate the year-over-year differences in accounting unit revenue for our affiliates was down 3.1% for year over year But, if you would adjust for the fact that the average stage linked increased by 8% unit revenues was actually better by 2.2%.

Same holds true on the yield side, year-over-year decrease of 1.4% in the second quarter, prior to a stage link adjustment on an adjusted basis yields were up 4%.

Load factors were down by 1.2 points during the quarter on a 20% increase in capacity.

I think the overall take away today should really be one of cautious optimism.

Positive news is that we are making terrific progress on the cost front led by the very painful concessions made by our employees suppliers and creditors.

Our liquidity has improved significantly and with the access to the capital markets that I believe we now have we should continue to built cash this summer.

The tougher news is that while the revenue environment has improved it continues to be depressed relative to historic levels and we must see continued improvement in the revenue environment.

Return to sustainable profitability at acceptable levels.

So with all this as background Gerard and I will now be happy to take whatever questions you may have.

Thank you, sir.

We will begin the analyst question-and-answer session.

If you would like to ask a question please press star 1.

You will be announced prior to the question, to withdraw the question please press star 2.

Once again, to ask a question, please press star 1.

One moment, please.

Our first question comes from William Green of Morgan Stanley.

You may ask your question.

Thank you, good morn or good afternoon.

The question I have is with regard to the pension expense the P&L impact.

How much has that changed in 2003?

I think the number you gave us before was 700 million or so.

Yes.

Well, the -- clearly, let me answer a little bit more than you ask, Bill.

From a funding perspective which I talked about in my notes, our funding for this year is about 186 million and for next year between 500 to 700 million.

And that '04 number is down a little bit based on all the concessions we made.

On the expense side, while the original number we had was about $700 million, that number now has come down to well below $600 million.

Now, there's a lot of moving pieces to that.

Because as I mentioned, one of the things we had to do was do what's called a Remeasurement of our pension plan as a result of all the changes.

That actually because the interest rate environment was lower in April than it was in December, we had to lower our discount rate which of course increases our expenses.

So you have a lot of moving pieces there.

But the net effect is a good guide of over $100 million a year.

Okay.

And then next year is that roughly the right number in terms of the P&L expense?

Well, you know, as I sit here today, I could speculate that if the interest rate environment is exactly as it was on April 22nd when we did this remeasurement and nothing else changes, yeah, it's in the ballpark.

Yeah, I'm not sure I feel capable of predicting what the interest rate environment's going to do.

And then as a follow up chasm when you think about it on a consolidated basis or main line, how low do you think it can go once you've put in place the savings, when you look the out to 05, how much further do we have to go?

Bill, as I think you know, I've really resisted giving people a cost for ASM target.

I'm haunted by Delta 7.5.

The way we think at all of our savings is we are working against a baseline of 2001 and our savings are meant to move us relative to the competition.

There are costs that affect all of us.

Airport facility fee increases, medical cost increases, change in the interest rate environment, things that affect all of us that I can't control which is why I'm going to duck your question and not give you a final target.

We think we can continue to drive it down from the kind of numbers that I just gave you for the third quarter.

But because I don't know what's going to happen with all those externalities –I just dont’t want to put a specific target out there.

Let just ask in a slightly different way.

In terms of the run rate of the savings that you've gotten, how much more from the second quarter is there to get?

We'll have most of them Jeff in place by the fourth quarter of this year, with the exception really of our pilots, which we will continue to furlough pilots going into April of next year, as we go through this master shuffle that we're going through.

And the other things that we've got that we continue to work on is our fleet simplification efforts and other efforts under our $2 billion program.

So I would I this by the first quarter of next year most of the things that you know about sitting here today would be in place.

Okay.

Thanks for your help.

To put numbers to that, Bill, as we've said, the labor savings are at their full run rate by the fourth quarter, that's $450 million. […]By the fourth quarter you have all the[…] labor all the 200 nonlabor and of the $2 billion of strategic initiatives our run rate is a billion 3 and you got an incremental 350 in '04 and another 350 in 05.

Thanks for your help.

Next question comes from Ray Neidl of Blalock.

You may ask your question.

I just wanted to verify what you've said that the pricing environment remains weak.

I guess what you're telling us is the business traveler is not coming back at this point as far as you can detect?

Well, Ray, I think what I heard Jeff say, and what I see in the data, is some indication of progress with the business traveler, not anything to jump up and down about.

But I think we are seeing some positive trends in some areas of our domestic yield year over year.

So I think your comment was a little too negative.

Okay, good, that's good to hear.

The other thing is more of a general type of question, if you can share your viewpoint with us, is what is your opinion at American about what some of the other legacy carriers are doing in wanting to start a low-cost airline within an airline, and the second part of that question is, more and more of the legacy carriers are doing outsourcing as far as maintenance goes.

I know you're still doing a study in that area but what are your initial thoughts on that?

Well, Ray, the airline within an airline concept is one that historically we have not pursued that to solve the big -- the overall airline's problems.

Because I philosophically, I think, we've had the view that with 800 large jet airplanes, you can't take 25 or 50 airplanes and, by creating a low-cost subsidiary, solve an 800-airplane problem.

And that's why all of our restructuring efforts for the past two years have been focused on how do we take 800 airplanes and fix that problem first.

And that's -- and you're familiar with everything we've been doing and our turnaround plan and its four tenets.

And we continue to make the tough decisions that we need to fix the overall airline's problems.

Now, having said that, I think once you get the mother ship if you will sorted out, then I think from our standpoint you could tactically think about whether some low-cost variant could or couldn't help you.

So I wouldn't rule it out.

But I think it has not been a priority for us because we wanted to fix -- we wanted to make sure we stayed focused on fixing the overall company first and foremost and I think we're well down the path of getting that done.

On your second question, related to maintenance and outsourcing, you're correct, obviously that a lot of airlines are outsourcing the preponderance of their maintenance.

Most recently United taking a lot of their heavy work to third-party providers.

And there are definitely some advantages to doing that but there are some disadvantages.

And one of the advantages that we have, keeping the preponderance of our heavy maintenance in-house is from a man hour standpoint, we are very efficient.

Because we produce so many sea checks each month by each fleet type.

And by doing so, by pumping these airplanes in and out of our maintenance bases, we get very efficient at it, and we drive the hours per heavy check down to levels that are very difficult for an outside provider to match.

Now, that's -- that's the good part about keeping it in house.

The outside providers generally have a substantially lower labor rate than we do internally.

So the proof of what's best will be in the confluence of labor rate and number of hours to do this work.

And I don't know how that will all sort out.

But what we've got to do because we don't have the right contractually, to take our heavy work out, we've got to continue to get more and more and more efficient moving forward.

So that we drive our hours per heavy check down.

And I think we've got a good shot at doing that.

There's a lot of friction cost associated with taking your work on the outside, not to mention a lot of FAA scrutiny that is becoming more and more heightened as we speak.

Okay.

And as far as renegotiating your aircraft leases, are you in pretty good shape with that almost done, and I guess you can't do anything with your ETC holders in talking about changes in terms, as long as you stay out of bankruptcy court.

But in the aircraft leases where would you say you stand there?

I'd say Ray that we're done.

We are very appreciative and pleased with the help that we got from, as I said, the financiers of almost 200 of our aircraft.

We hit our target of wanting to be near 200 million dollars a year in savings.

There is still a little bit of one-time accounting as I said you'd see in the third quarter.

And you're also correct that no, we didn't touch anything in the public arena in fact I'm not too sure that our two bankrupt competitors have either.

Good.

Good progress guys.

Thank you Ray.

Our next question comes from Michael Linenberg of Merrill Lynch.

You may ask your question.

Good afternoon, and by the way nice improvement here.

Two quick questions.

I guess Jeff you talked about a vendor driven squeeze on the cash front.

Can you give us a sense of how much cash could be freed up as your overall balance sheet improves?

Well, I don't think I want to put a specific number on it Michael.

Let's just say when a company goes through what we went through in the first quarter of this year up through April 24th, a lot of bad things got to compound each other and build upon each other and one of those things is your suppliers get nervous and everybody puts you on cash pay.

One of our real challenges right now is rebuilding confidence in the financial markets, rebuilding confidence with our customers and rebuilding confidence with our suppliers so we can get some of that money back and I'm confident we will.

I just don't want to put a specific number on it.

Okay.

That's fine.

My second question is, regarding the St. Louis hub, when you look at the departures that you have in place, I guess effective November 1st, the number's down 50%.

Is your total ASM number, is that down by a similar amount or is it down by an even greater amount?

Do you mean at St. Louis or for the system?

At St. Louis.

You know, that's an easy number to calculate, Michael.

I don't have it off the top of our head, though.

We can get it for you.

I think directionally, [because you going to have more regional…] the ASM should be down a little bit more.

Okay.

Thank you.

And very good progress.

Thanks Michael.

Gerard Arpey;

Thank you Michael.

Our next question comes from Jamie Baker of J.P. Morgan.

You may ask your question.

Good afternoon, hi Jeff, good use of the word radical in your opening comments.

I like that.

The industry was generous during the year by allowing leisure passengers to rebook without penalty.

Is there a way to measure how much of that rebook demand has been – has taken place and therefore has been recognized as revenue?

I was staring at Gerard waiting for him to -- I don't know that I have an answer for that Jamie.

I think it's a very good question but I don't know how to quantify the amount of that.

I mean, we are pleased by the fact that while revenues are historically weak, year over year they were stronger in May, they were stronger in June and frankly July is clearly going to be stronger year-over-year.

But I don't know how to speculate on the exact source of those increases.

Okay.

I didn't know if that was something that was easy to track, you know, by P and R or something like that.

At least the way we track it.

The real test for us and for the industry is going to come when we get to the fall and we see how fall revenues really do.

Summer looks reasonably good.

Okay.

Secondly, how do you expect your regional main line mix at St. Louis to change, and do you see any need there to bring on new regional partners to complement your existing franchise?

Well, Jamie, if you look at the schedule today, the July '03 schedule, we have 417 daily departures.

And that breakdown today would be 213 big jets, American Airlines jets, 91 regional jets and 113 turboprops.

In the November 3rd schedule, we'll have 207 total departures, 53 big jets, 85 regional jets, and 69 turboprops for the total of 207.

And I think to answer your question, about where we go from there, I think we're going to have to see how we do with the schedule and depending on demand and profitability, we'll continue to adjust the schedule both with big jets and with our commuter partners.

My hope is that this 207 departure schedule that we're going to put in place, I think it has a good shot at being profitable.

And my hope is that we will now have a profitable base in St. Louis off which we can build moving forward.

But we'll have to wait and see how we do.

Okay.

Those were precisely the types of numbers I was looking for.

Thank you very much.

Okay, thank you.

In the interest of time we will ask that participants please limit your questions to one.

Our next question comes from he Lane Becker of Benchmark.

Hi gentlemen.

Can you quantify Jeff how much of the improvement you are seeing in revenue as a direct result of not having to pay government fees this summer and how much is from true sustainable revenue increases?

Well, I can't give you that exact number but what I can point out is, I think it's fair to say the number in June just because of the timing of the way the fee [--] I want to use -- fee holiday was put in place, it shouldn't really have affected our June revenues much.

And so I feel actually pretty good, Helane, about saying the year over year trend, that we’re seeing particularly when May obviously wasn't impacted at all,and June 3%, I don't attribute any significant amount of that to the fee chain.

As we get to July and we haven't seen July numbers although we are encouraged by them, there may be a piece contributed by the government, but what I seen so far in July suggest to me that even accounting for any impact that might be there from that fee waiver, I feel very confident June or July revenues are going to be up year over year as well.

Okay.

Thank you.

Thank you Helane.

Our next question comes from Gary Chase of Lehman Brothers.

You may ask your question.

Good afternoon, guys, welcome Gerard.

Thank you Gary.

Just a couple of quick questions for you, first Jeff, there are a couple of line items that have some pretty large variances, you know whether you want to look at it first to second quarter year on year.

Those are maintenance and your other expenses.

Is there any color there that we ought to be aware of, anything specifically on the maintenance side?

Was there anything there timing-related that ought to reverse?

You know, the honest answer, Gary, is there is on both those lines no one or two big things that we can point to that drove those increases.

And I think those two line items are wonderful examples of what I cited in my comments, which is that while the labor and nonlabor savings are the biggest driver of the dramatic or radical change from April, May to June, we are working hard in every area of our business.

And so you look at the M and E side or M and E line and it's about finding ways as we shrink the fleet, as we go through the process of grounding the F-100s, we are able to cannibalize some of the planes that were sitting on the ground.

And really what you're seeing are the savings from the $2 billion in strategic initiatives that I keep talking about in those two line items.

I guess the other expenses kind of make sense but to be down 20% from the first quarter in maintenance, just kind of I mean is that a run rate that we ought to assume, 190 to $200 million is that about where you'll be?

I would be cautious about trying to take any quarterly number on maintenance and assume that runs forever.

Because clearly there are some lumpiness in maintenance.

I have every confidence in saying it is down and will continue to stay down.

We should go reconcile this for you Gary but I would suspect that the grounding of the F-100 fleet and we are able to fly those airplanes to their retirement without planning to continue to operate them is a big chunk of that.

But we can reconcile that for you.

Okay.

Just another quick one.

On the 175 to $200 million in vendor supplier and other, how much of that was realized in the current quarter, and you know, is there a way to get a sense of what line items it hit?

Well, in terms of line items, it's kind of all over.

Because you see it all over from interest expense to aircraft rent to every other line item in terms of the stuff we got from vendors.

In terms of what is realized, I think of the $200 million, if you assume that you were with probably about half-way there in the second quarter, that's a reasonable assumption.

Okay.

And just one last one.

Gerard, you had mentioned there were some things that were going on that were positive on the yield front.

You know, from the outside it kind of looks like June, despite the fare hikes that you had that were related of course to the segment tax holiday and the fact that you weren't collecting those taxes, seems like yield was for most people anyway down in June.

I don't know if that was specifically the case for American.

But just wonder if you could give a little more color around your statement there.

And maybe just comment on why you think that is.

I mean, why the yield weakness in the face of what should be tail wind for you?

Well, I don't know that I can explain why -- why all of our -- not all of but the preponderance of our year-over-year improvement in revenue is being driven by load factor.

Because the industry is running substantially higher load factors year-over-year.

And -- but there still does not seem to be any pricing power in the industry.

But my comment was related to some of the trends that we're seeing in some of the entities.

Because we're obviously looking at the data across each of the hubs.

And in some segments we are seeing improvement in yield.

So while most of it is load factor driven, I think there are some encouraging signs in some of the domestic markets.

But as Jeff said it's really -- the booking patterns have really changed in our industry, and people are booking much more close in than they have historically.

Which makes it very difficult for us to predict what the fall's going to look like.

And that will be the real -- we'll be very telling in terms of how sustainable this improvement is.

Once we get through all this leisure summer traffic how much business traffic is there?

So that's a long-winded way of saying I think we'll have to wait until the summer is over and see -- it will be a lot clearer how much business traffic is really there.

Thanks a lot you guys.

Thank you.

Our next question comes from Glenn Engel of Goldman Sachs.

You may ask your question.

Well done gentlemen.

Thanks, Glenn.

One just where do you expect headcount to eventually level out to?

At the AA level, the number will be below 80,000 by, if you add American Eagle on top of that, Eagle has been running ten to 11,000.

Once we're through implementing all the labor changes we've got underway now that's about where we should be.

Secondly when you look at your flying you probably do more flying that is point to point doesn't touch a hub than most other carriers, and a lot of flying I would call sort of strategic where you want to have a presence in markets.

Can you afford to be still doing that and should we be seeing cuts in those type markets?

Well, Glennn I guess I'd like to see the data that you're looking at that compares us to the other airlines.

But I think we're -- I think the announcements today with respect to St. Louis underscore the fact that we're looking hard at all of our flying.

And I've historically not been a very big believer in strategic flying.

Although there is -- you know, some method to that way of looking at things.

But fundamentally you've got to fly airplanes and they've got to make money where you fly them or you've got to have a real compelling argument that they're driving halo to the rest of your network.

So I think you're going to continue to see us take a hard look at all of our flying and if we don't think we'll make money in the long run we'll continue shifting the network.

Today's decision was one of the biggest opportunities that we had to improve our overall results without actually changing our overall level of flying, just moving it around.

Our next question comes from Jeff Kaufman from Fulcrum.

You may ask your questions.

Congratulations on solid results today.

Most of the tough questions have been asked so let me ask kind of a thought question to Jeff.

No doubt some of this legislation being kicked around on the pension reform side is of more than a passing interest to you.

Have you done any kind of early iteration work on the current proposals which I think you're talking about a 150 basis point increase in some of the discount rates, just get a rough idea of what that might do to the five to 700 million range that you gave us for cash pension cost next year or just kind of give us a sense of what some of the things being discussed may or may not do to pension expense next year?

That's a good question Jeff and we're paying a lot of attention what's going on in Washington, D.C.

There are quite a wide range of proposals being banldied about.

Couple of legislators who have introduced frankly some more dramatic proposals and there's even some legislation being pushed by some of our colleagues in the industry and interestingly enough some of their unions that it's specific to the airline business and frankly could have quite a radical impact on our pension contributions.

Some of the more radical proposals could change those numbers by, you know, over the course of let's say '04-'05 time frame by a billion dollars.

So you know, there's such a wide range, I hesitate to speculate.

But let's say even, you know, any of the proposals being talked about are going to save us hundreds of millions of dollars in contributions in '04 as well as in '05.

So we are paying a lot of attention.

But let me just also remind you these are long term obligations.

While we are certainly underfunded interestingly enough we are actually a little less underfunded by our other legacy peers.

So we'll have to see where it plays out.

Next question from David Stein of Bear Stearns.

Thanks.

Hello.

My questions were just answered but I wanted to circle back just a moment to Jeff's comments about business traffic improving in June.

Number 1, is that just confined to domestic operations and two, can you give us an idea of you know what the mix is and what the trend in the mix looks like?

Well, my comments were driven by the way we look at business traffic, and frankly our biggest corporate accounts in terms of their global travel.

It's not a domestic comment, it is a comment in terms of what we see.

And you know, I don't know that we can add a lot.

Frankly, beyond what Gerard and I have said on traffic, we're encouraged by the trends.

I might just clarify based on some of your earlier questions, and let's remember the taxes that we have a little vacation from here for the summer were never in yield.

You know, it's separately accounted for.

So the fact is that we know we have to pay those taxes doesn't automatically help our yield.

There was a $5 fare increase that went in May.

Which is why I don't think you'd see that much in June, need a little bit more time to pass.

And in fact there have been even some positive fare developments on the leisure side.

Interestingly enough, part of what's going on is you've got a little bit of pricing power on the leisure side wall, on the business travel side, even as the volume picks up people are trading down a little bit.

So you know, lot of different moving pieces there which is why I think we just bring you back 50,000 feet and say we're encouraged, and hope the trends continue.

Okay.

We have time for one more question.

Our last-our next question comes from James Higgins of Credit Suisse First Boston.

You may ask your question.

Yes, hi, thanks.

You've obviously gotten a lot more flexibility in adding regional jets.

Can you give us just any comments you can about what we should look for in terms of timing for any kind of strategic moves in that direction?

Well, Jim, we've already got, and I think Jeff commented a moment ago about our capital spending program for next year and '05.

And I don't have the numbers in front of me but we already have a bunch of regional jets on order.

And so you're going to see us already, with the current capital spending plan we have, growing our RJ fleet rapidly in the next two years and then making decisions about the pace at which we retire our turboprop.

If you look at where we were prior to this restructuring of our labor agreement, we were not -- we had ordered more airplanes than we could take, and still been in compliance with our contract.

So that's why we were, prior to this labor agreement, we were getting busy thinking about spinning off executive airlines and busy getting rid of airplanes.

And now we are back focused on keeping those airplanes in house and building our own RJ fleet.

As far as what we may do next I wouldn't anticipate any time in the near term a big announcement on another RJ order.

Great, thank you very much.

Thank you Jim.

Thank you everyone for joining us today.

For the analysts, we'll ask you to please sign off now, and folks of you from the media please hold on and we'll be right with you.

This concludes today's conference call for all analysts.

Media please stand by.

Your question-and-answer session will begin shortly.

Thank you.